Yahoo! Profits Likely Down, More Layoffs Possible

The Valley’s expectations for Yahoo!’s
near-term financial performance? Not so great.

When the Sunnyvale, Calif.-based company reports earnings Tuesday, “it might not be a disaster,” says Sanford C. Bernstein analyst Jeffrey Lindsay. But the company’s fourth-quarter profit is expected to be down from last year, due mainly to an anemic online advertising market. That’s where Yahoo! gleans most of its revenue.

It’s also possible that Bartz, who joined the company Jan. 13, could announce more layoffs Tuesday. Analysts say the company probably laid off about 10% of its employees in the just-ended fourth quarter and could slash more jobs. Wall Street is also hoping Yahoo! will pursue some sort of business tie-up with
Microsoft
, which would bolster Yahoo!’s search advertising business. But a deal is not expected to be announced this week, if one is in the works.

Still, “if it wasn’t for the potential of a Microsoft deal, or a Microsoft acquisition, Yahoo! [shares] would probably be down a lot more right now,” says Todd Greenwald, an analyst with investment firm Signal Hill. Yahoo!’s stock is down 48% over the last year.

Greenwald believes a Microsoft deal is still a possibility despite the software giant’s dismal earnings report Jan. 22 and its plan to lay off 5,000 workers. Microsoft still has hordes of cash to spend on acquisitions and other deals, he says. And “as bad as Yahoo! is doing and as much as they’re struggling, Microsoft is doing far worse” in its Internet businesses, so it needs to find a way to make more money, Greenwald says.

Greenwald expects Yahoo! to report pro-forma net income of $168 million, or 12 cents a share, for the fourth quarter, down from $280 million, or 20 cents a share, in last year’s fourth period. He expects quarterly revenue to decline, to $1.35 billion from $1.4 billion a year ago.

The main problem for Yahoo!’s finances right now: Its dependence on garden-variety “display” advertising, which advertisers buy in much the same way they shell out for traditional print advertising, like billboards or ads in magazines or newspapers. The market for Web display advertising has been hit hard by the recession, as big companies are now unwilling–or unable–to pay as much for online ads as they once did.

Display advertising accounts for about half of Yahoo!’s net revenues, according to Bernstein analyst Lindsay. He says display ad revenues across the Web were down about 10% in the fourth quarter, though they probably dropped only about 5% at Yahoo!. Online ads linked to search results held up much better, he says, though such ads account for only about a third of Yahoo!’s total sales.

Indeed, search giant
Google
–which makes the vast majority of its money from ads linked to Web-search results–reported on Jan. 22 an 18% increase in the fourth-quarter revenue. Profit sank 68%, but a large chunk of the decrease was the result of write-downs on outside investments and not the company’s core search business. Yahoo! has been struggling to compete with Google, but Bartz’s appointment is expected to usher in new competitive strategies.